Lafarge divests to pay down debt – what’s next?

13 May 2011

Lafarge is on track to meet its 2011 debt reduction target of €2bn following the announcement of the sale of its cement and concrete assets in the southeast United States to the Colombia-based conglomerate Cementos Argos. Argos, meanwhile, consolidates its footprint in the US, becoming the second largest cement producer in the southeast region.

The assets, which amount to 3.2Mta of cement capacity and 3.3Mm3 of ready-mix concrete, have an enterprise value of US$760m (€533m) and generated a turnover of US$240m (€168m) last year.

Two integrated cement works, at Harleyville in South Carolina (1.1Mta) and at Roberta in Alabama (1.6Mta) together with a grinding works at Atlanta, Georgia (0.5Mta) are involved in the deal. These three plants all came to Lafarge through the acquisition of Blue Circle Industries in 2001. The deal also covers five rail terminals, one marine terminal and 79 ready-mixed concrete plants.

The sale will leave Lafarge with 21 cement plants, including grinding units, in North America with a total capacity of some 19Mt. The disposal price equates to 1.75 times the average sales of the assets over the last five years, and 8.4 times their average EBITDA over the same period (US$91m). Analysts from Jefferies assessing the deal viewed the price achieved as “fair but not generous” and commented that although these assets were not core to Lafarge’s North American operations, they would not have been sold if Lafarge’s balance sheet was stronger. Nevertheless, the sale will help Lafarge cut interest and depreciation and deliver an expected full-year pre-tax impact of between US$40-45m, while boosting earnings by up to US$30m.

Ultimately, the deal allows Lafarge to meet its disposal target of US$750m for 2011, representing a significant share of its overall debt reduction target of €2bn for the same period. However, with a debt mountain of €14.24bn reported at the end of 1Q11, and weaknesses in key markets such as Egypt, restoring its financial profile will continue to be a challenge for Lafarge going forward. An uncertainty also remains over its operations in China, where joint-venture partner Shui On Construction and Materials Ltd recently announced plans to withdraw from what it described as an underperforming business. The risk is that Lafarge will be forced to purchase Shui On’s 45% stake in the venture at a time when it is attempting to minimise expenditure.

Lafarge’s yet-to-be finalised JV with Anglo American’s building materials businesses in the UK complicates the situation further. While the deal offers excellent synergies – in excess of UK£60m – with no cash outlay for Lafarge, the company may next have to fund a buy out of Anglo’s 50% stake in the JV, whose assets are worth approximately UK£3bn, as it is the latter’s intention to seek a quick exit (within 1-2 years). Even if Lafarge does dispose of some non-core assets associated with this deal to avoid anti-competitive action and pay down debt, this could be a significant additional cost during a period of deleveraging.

All this may make the disposal of Lafarge Gypsum seem even more timely. Indeed, the sale is currently in the first round of the bidding procedure and has attracted a range of offers for this division valued by Lafarge at some €800m. But will the bigger shareholders ultimately sanction such a sale at the bottom of the market?

All this may make the disposal of Lafarge Gypsum seem even more timely. Indeed, the sale is currently in the first round of the bidding procedure and has attracted a range of offers for this division valued by Lafarge at some €800m. But will the bigger shareholders ultimately sanction such a sale at the bottom of the market? It’s a possibility that they won’t, in which case Lafarge will have to seek alternative disposal opportunities, perhaps along the lines of the US one. Some analysts have suggested Lafarge’s German assets are a potential target. They comprise 3.4Mta of cement capacity, and are no longer integrated as the downstream side has already been sold.
Published under Cement News